NCLT annuls Jaypee Infra’s land mortgage with lenders of Jaypee Associates

In a landmark ruling, the National Company Law Tribunal (NCLT) has concluded that Jaypee Infratech’s move to create a mortgage of 759 acres of land to secure the loans of its parent Jaypee Associates Ltd (JAL) was “fraudulent, preferential and undervalued”.

The Tribunal’s Allahabad Bench has in its 77-page verdict ordered the release and discharge of this ‘security interest’ created by Jaypee Infratech in favour of the lenders of Jaypee Associates.

This is the first time since the the Insolvency and Bankruptcy Code 2016 came into force that a transaction conducted prior to a company (Jaypee Infratech) being brought to insolvency process is getting reversed because it was found to be “fraudulent, preferential and undervalued”, say insolvency law experts.

The latest ruling clearly showed that a Court was willing to reverse transactions that are detrimental to the creditors of the ‘debtor company’ (Jaypee Infratech in this case) that are facing insolvency process.

IBBI Chief MS Sahoo had warned of action under IBC against those directors who failed to discharge their duties in the interest of the creditors during the ‘twilight zone’ period.

The ‘twilight zone’

The ‘twilight zone’ refers to a ‘look back’ period: it can be a few months to a few years before commencement of the insolvency process. The ‘twilight period’ is not defined in the IBC.

While the NCLT concluded the creation of mortgage by Jaypee Infra during the twilight period and in favour of lenders of its parent as “fraudulent, preferential and undervalued”, no action has been recommended against the directors of Jaypee Infratech.

Saurav Kumar, Partner, Induslaw, a law firm, said that judgments such as this instil faith and go long way in implementing the intent of the Code.

“The importance and effect of Sections 43, 45 and 66 of the IBC has been clearly brought out by the judgment — that preferential, undervalued and fraudulent transactions undertaken by the management of the corporate debtor, to the detriment of the corporate creditors (including home buyers) and shareholders are to be set aside and reversed,” Kumar said.

However, the Tribunal did not pass any order against the directors of the corporate debtor (Jaypee Infratech) to hold them responsible and require them to contribute to the assets of Jaypee Infratech.

“Imposing accountability and liability on the directors may serve the intent of the Code along with establishing good and responsible corporate governance”, he said.

Pankaj Mahajan, Head Restructuring and Insolvency, Mazars Advisory LLP, said the intent of the law is “restoration”.

Had the “restoration” not been possible, the directors would have been directed to compensate to the extent Adjudication Authority would have deemed fit, he said.

“At the most, the Adjudicating Authority could have ordered under Section 67, that the debt owed to JAL (₹261.77 crore as mentioned in the order) would rank last in the waterfall prescribed under Section 53 (liquidation). Again Section 67 provides discretion with the word “may” being used and again going by the intent of the law, here the word ‘may’ shall not be construed as ‘shall’. The Bench has been lenient in this regard, Mahajan said.

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